Susan E. Thomas CPA
How can I raise capital for my business?

The two general categories of financing available for businesses are debt and equity. Debt requires repayment of a loan. Equity involves raising capital by selling parts of the business to investors.

How much money your business needs, how the financing will be used (start-up, expansion, new development), as well as how your business is organized, its size, and its stage in the business life cycle (start-up, growth, or mature phase) are just a few of the things that may influence your efforts to raise capital.

If yours is a new business without a track record, you may have difficulty raising capital from lenders or investors. A first place to look for capital might be your own assets. You may be able to raise money for the business from your savings or borrow against a retirement plan, life insurance policy, credit card, or the equity in your home.

If your business is more established, you may be able to borrow from a number of sources. You can apply to banks or credit unions for loans. You can contact the Small Business Administration for information on the programs it administers to help businesses obtain financing. Your local chamber of commerce may be able to put you in touch with state and local agencies that provide financial assistance to new businesses located within your geographic area. You need to have a detailed business plan to provide to potential lenders or investors.

Your options to raise equity may include wealthy private investors known as angels, venture capital firms, private placement of equity, and investment clubs. Small business investment companies may act as lenders or investors. For some corporations, an initial public offering is used to generate large sums of cash through the sale of company stock. A potential drawback of equity financing is that investors may expect to exercise some control in the running of the business.

Some creative entrepreneurs can now use the Internet to raise money. The Jumpstart Our Business Startups Act of 2012 directed the Securities and Exchange Commission (SEC) to create rules that would allow entrepreneurs to raise money through crowdfunding without running afoul of existing securities issuance laws. The final rules took effect on May 16, 2016."Regulation Crowdfunding," as it's now known, puts the following rules in place:

  • A small company can raise up to $1 million over a 12-month period through crowdfunding. (Some exceptions apply.)
  • Individual investors can invest certain amounts over a 12-month period across all crowdfunding offerings based on their annual income and asset levels. Investors whose annual income or net worth is less than $100,000 can invest the greater of $2,000 or 5% of the lesser of their annual income or net worth. Investors whose annual income and net worth are both at least $100,000 may invest up to 10% of the lesser of their annual income or net worth.
  • No more than an aggregate of $100,000 in equity crowdfunding offerings may be sold to an investor in a 12-month period.
  • Securities generally cannot be resold for at least one year.
  • In addition, small businesses will be required to provide certain information to the SEC, potential investors, and the crowdfunding platforms facilitating the transactions. Among other details, this information includes:

  • The price of the securities or the method of determining the price
  • The target offering amount, the fundraising deadline, and whether the company will accept investments exceeding the target amount
  • Financial statements that may need to be accompanied by the company's tax returns and reviewed by an independent public accountant or audited by an independent auditor (Note: For companies offering securities for the first time, reviewed statements will meet the regulations)
  • A description of the business and how the crowdfunding proceeds will be used
  • Information about company officers, directors, and 20% or more owners
  • Moreover, crowdfunding companies will have to file an annual report with the SEC and provide it to investors.

    Companies that will serve as funding portals have their own set of regulations to follow. Among them are the requirements to take certain measures to reduce fraud risk, to make crowdfunding company information available on their websites, and to provide communication channels that allow discussion about platform offerings.

    Finally, before making any investment commitment, an investor must acknowledge that he or she has reviewed the funding portal's educational materials, understands that the entire amount of his or her investment may be lost and is in a financial condition to bear the loss of the investment, and has completed a questionnaire demonstrating an understanding of the risks of any potential investment and other required statutory elements.

    There are also internal business sources for raising business capital. Consider offering incentives to your customers for early cash payment (such as a discount) to accelerate your collections and free up operating cash. You may choose to lease company assets rather than buy them. Finally, your company may be able to negotiate special delayed-payment terms with suppliers or factor accounts receivable, which entails getting an advance on money owed to you.

    Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011